European leaders are poised to announce a 750 billion euro deal to bailout beleaguered Spain and Italy by buying the countries debts.

Pan-European Government funds are set to be used to buy Spanish and Italian bonds, which have recently hit record highs  in a move which will send a strong signal to financial markets that the German administration is prepared to back its weaker economic neighbours.

Angela Merkel and other European leaders have come under intense pressure at this weeks G20 summit to take radical action to stem the growing euro crisis which has pushed up the cost of Spanish bonds to unsustainable levels.

Francois Hollande, the French President, said: It will be more on mechanisms that allow us to fight speculation.

The French president said rates paid by Spain and Italy to borrow on debt markets were unacceptable.

We must show a much faster capacity for action, Mr Hollande said.

Under the proposed deal, two European rescue funds  the 500 billion-euro European Stability Mechanism (ESM) and the 250-billion euro European Financial Stability Facility (EFSF)  will be able to buy bonds issued by beleaguered European countries.

Previously, money in these funds  which has been provided by members of the single currency  has been used to bailout smaller European countries such as Greece, Portugal and Ireland. Governments in these countries are offered money direct return for agreeing to austerity programmes.

Under the new plan, the money in these funds will not be given directly to governments but will instead be used to buy up debts on the financial markets. The European Central Bank previously bought about 210 billion euros of bonds in this way but stopped last year.

I really don't understand how a pan-European fund can buy up bonds. Does any government have any real money, or are they simply borrowing to borrow? For example, Japanese national debt is something like 200% of their GDP, and they're one of the largest holders of US government debt. As I understand it, they are literally borrowing money to buy up US debt that is also borrowed. The US might also own Japanese bonds, but the US is also deficit spending.

As I wrote, I may not properly understand what's going on. It seems like two indebted people running up more debt on their credit cards to buy from each other. If so, that doesn't sound like very sound financing to me.

BTW, I used Japan as an example, because it’s national debt to GDP ratio is one of the worst. However, I think European government are pretty much all in deep, too. Germany is supposed to be one of the better ones, but I think its debt to GDP is something like 65%.

“He added: The eurozone is inching towards solutions. Basically, we do need to see the richer countries, like Germany like Holland, spend some of their resource in propping up the weaker countries of the eurozone.

Obviously it is difficult for them to do that, it is not a popular thing to do but it is absolutely necessary. “

The problem of course is when the wealthy nations elect leaders who say no to spending. Thats why the unpopular statement. Merkel walks a fine line.

8
posted on 06/20/2012 12:53:25 AM PDT
by wiggen
(The teacher card. When the racism card just won't work.)

Basically, we do need to see the richer countries, like Germany like Holland, spend some of their resource in propping up the weaker countries of the eurozone.

“Obviously it is difficult for them to do that, it is not a popular thing to do but it is absolutely necessary.”

Necessary for whom? And for what purpose? The only people who need this are the Eurocrats. European politicians are betraying their own people and blowing everybody’s savings and retirement funds on this until the entire continent will be bankrupt. And the worst part is that there is no apparent way to stop them. There are no opposition parties promising to stop this madness. No matter who you vote for, all politicians are determined to sacrifice everything for the EUSSR. Democracy has failed.

“[Greek government policy is] known as ‘drinking your way back to sobriety’.

The deficit spending the Greek government wants to do is almost-entirely suppressive or neutral to GDP - it is spending by government, for government, on government. The population is shrinking, their internal revenue picture is already dreadful and only getting worse (because they have the worst ratio of producers to consumers of tax funding in the civilized world, and getting worser) and the only way any government of Greece can survive and keep the mayhem in the streets down to acceptable levels is to restore the drunken-sailor approach to public spending that got them into trouble in the first place. This means 14 monthly pension checks a year, retirement at 50 for workers in hazardous trades like hairdressing, and all the other 1,001 ways they managed to bankrupt themselves already.”

Unfortunately, it doesn’t seem like the Greeks are the only ones “drinking their way back to sobriety.” As I wrote, I don’t think governments are only borrowing to prop up their own debt. I think they’re actually borrowing to buy up the debt of other nations. That’s like using debt to finance debt, isn’t it?

The US apparently has more room to maneuver than Greece. We can manipulate interest rates, but what happens when we can’t make the payments even with a zero percent interest rate? Plus, we have something like $100 trillion of unfunded promises made, like Social Security, Medicare, Medicaid, etc. Is it possible to print that much money without blowing up the economy? I guess we’ll find out.

750 billion is enough to push spain from a ratio of 60 percent of Debt/GDP up to around 110 or so.

Think of it this way. They have borrowed money on credit at, say several percent. Spain has to roll over the money that it borrowed (ie, pay out), when the term comes due. What has been happening is that instead of 2 percent, Spain is looking at 7 percent. At 100 percent of GDP - if borrowing costs hit 7 percent, that means that a full 7 percent of the economy is spent just on nedebt

Germany + France have enough elbow room to do one more of these for about 1 trillion, less if Hollande manages to spend things up domestically. Would take about one or two years for Hollande to do that.

"What has been happening is that instead of 2 percent, Spain is looking at 7 percent. At 100 percent of GDP - if borrowing costs hit 7 percent, that means that a full 7 percent of the economy is spent just on nedebt"

Think of it this way: The 7% is on the benchmark 10 year bond. 7% compounded equals the principle in 10 years.

Now, if Spain could borrow at Germany's 2%, after 10 years there would be plenty left over for other things. They could even borrow to pay interest for a while.

At 7%, Spain is paying out, in interest, the entire value of the bond in the 10 years to maturity. They must roll over all bonds 'cause there is nothing left for maturity redemption.

When the benchmark hits 7% a country is doomed in short order.

Yes, even USA 10 years his 7%+ in the '80s, but not for long and the benchmark was 20 year bonds.

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